Washington — A Democratic upset on GOP turf in upstate New York signals that Medicare reform is a perilous issue for Republicans – but so are tea party candidates in a three-way race, tepid campaigns, and a flood of outside money.

That’s the mixed message from Tuesday’s special election in New York’s 26th Congressional District, a special election that drew national attention and funding as a bellwether for the 2012 campaign cycle.

House Republicans took the race seriously from the start, with Speaker John Boehner accepting the resignation of Rep. Christopher Lee (R) just hours after compromising photographs of him appeared on a gossip website. Big names appeared on behalf of the GOP establishment candidate; outside conservative groups poured funds into her campaign.

In the end, it wasn’t enough to fight off a Democratic campaign fixed on GOP plans to overhaul Medicare for seniors.

“We can balance our budget the right way – not on the backs of our seniors, but by closing corporate loopholes for companies that ship jobs overseas, and ending subsidies to Big Oil and yes, by making the multimillionaires and billionaires pay their fair share,” said Congresswoman-elect Hochul, in a statement after the vote on Tuesday. “And we can ensure we do not decimate Medicare. We will keep the promises made to our seniors, who have spent their lives paying into Medicare, so they can count on health care when they need it most.”

The House Republican budget for fiscal 2012 proposes replacing the existing Medicare system, headed for insolvency by 2024, with subsidies to help seniors pay for private health insurance. The New York special election marked its first road test with voters.

“What is clear is that this election is a wake-up call for anyone who thinks that 2012 will be just like 2010,” says Jonathan Collegio, a spokesman for Crossroads America, a conservative group that poured some $700,000 into television and Internet ads to boost Corwin's campaign. “It’s going to be a tougher environment, Democrats will be more competitive, and we need to play at the top of our game to win big next year.”

At the same time, tea party candidate Davis, a former Democrat who self-funded his $2.5 million campaign, focused on jobs and the economy, and targeted especially free trade agreements that “ship our jobs overseas.” He pledged to “put American jobs first.” Republicans dubbed him a spoiler.

“In New York-26, the Republican Party nominated a fairly conservative establishment Republican in Jane Corwin, but an ex-Democrat named Jack Davis, running as a 'tea party' candidate, siphoned votes from the Republican,” said Chris Chocola, president of the Club for Growth, a conservative advocacy group that backed Corwin, and a former representative from Indiana.

“The reason was not that Davis is obviously more conservative or because Corwin is not sufficiently conservative: It’s because Corwin did a terrible job articulating the free-market message, and Davis consistently demagogued the important issue of trade,” Mr. Chocola said in a blog on National Review online.

With the win in New York at their backs, Democrats are bringing the Ryan budget to the Senate floor for a vote this week, where it is expected to fail. Democrats hope these two defeats will force Republicans to be more open to compromise in ongoing negotiations over how to rein in deficits and raise the national debt limit. They also see the race as promising for campaign prospects in 2012.

“The voters in NY-26 sent a clear message that ending Medicare as we know it is not how we should tackle our nation’s deficits, and that’s a message that will reverberate across the country in 2012,” said House Democratic whip Steny Hoyer, in a statement after Tuesday's vote.

But political analysts caution that it’s a long way to November 2012, and what’s on the minds of voters can shift many times before the next reckoning at the polls. Political scientists John Pitney at Claremont McKenna College calls the outcome in the New York race “a sign that Medicare is a problem, but not necessarily a sign that Democrats are going to retake the House.”

“Republicans have known all along that Medicare was going to be a tough sell; their polling suggested that. They’re going to have to change the terms of the debate,” he adds. “If Republicans can keep the focus on deficit reduction and the national debt, they’re in better shape. If people are thinking about Medicare, Democrats are in better shape.”